The CEOs of Continental and United airlines were in Washington Thursday to defend their proposed merger. During a hearing held by the Senate Judiciary Committee's Antitrust, Competition Policy and Consumer Rights subcommittee, the airline executives heard concerns shared by senators and outright opposition expressed both by a consumer advocate and a law professor.
Opening the hearing, committee chairman Sen. Herb Kohl (D-Wisc.) said, "This merger will reduce the number of national network airlines. We need to ask the question, at what point do we reach a tipping point with competition? How will the loss of competition between these two national systems impact airfares and service?" Kohl stressed that the committee views the proposed merger with an "open mind" and said members are cognizant of the "foundation of a free market economy."
Nevertheless, senators noted areas in which the loss of competition presents particular concern. Sen. John Cornyn (R-Texas) said, "The new United will be the only airline flying nonstop from Houston Intercontinental to Washington, Los Angeles and San Francisco. On each of these routes, the merger eliminates a competitor and leaves Houston-based travelers with fewer choices."
"The scenario that sticks out the most is the potential overlap between the Cleveland and Chicago hubs," added Sen. Orrin Hatch (R-Utah).
In a report issued Thursday at the request of another Senate committee, the U.S. Government Accountability Office raised the same example. "It is uncertain whether the combined airline would retain eight domestic hubs," the report stated. "There is considerable overlap between markets served by United out of Chicago and Continental out of Cleveland. Fifty-two out of 62 domestic airports served by Continental from Cleveland are also served by United from Chicago."
When asked about the fate of the Cleveland hub, Continental CEO Jeff Smiseksaid, "We'll continue to provide good air service to every community we currently serve. The future air service will be dependent not on us, but on demand."
However, Consumers Union consultant Bill McGee said previous mergers between major carriers have led to service cuts--including "hub closures and flight reductions, despite promises to the contrary." He noted American Airlines' downsizing in St. Louis after AA acquired Trans World Airlines and US Airways' service cuts in Las Vegas after merging with America West. "It seems apparent that with the United-Continental merger, some cities, notably smaller communities, would lose nonstop air service, if not all air service."
Overall, according to GAO, "combining [United and Continental] would result in the loss of one effective competitor (defined as having at least 5 percent of total traffic between airports) in 1,135 markets affecting almost 35 million passengers while creating a new effective competitor in 173 airport pairs affecting 9.5 million passengers.
"The two airlines overlap on 12 nonstop airport-pair routes," GAO continued. "For seven of these 12 nonstop overlapping airport-pair routes (generally between a United hub and a Continental hub), there are currently no other competitors," though it acknowledged that "relevant competition" may be offered from alternate airports in the same cities.
University of Houston Law Center associate law professor Darren Bush said, "This merger may enhance or create dominance at many cities throughout the United States, including Newark, Houston, Chicago, Los Angeles, Washington, Denver and Cleveland." He noted particular "constrained" connection markets in the Midwest. Bush said he was testifying on behalf of nonprofit think tank American Antitrust Institute where he serves on the advisory board.
Debating Airfares, Efficiencies
The hearing included much debate on whether the merger would lead to higher airfares, and whether low-cost carriers would play a role in preventing such an outcome. According to GAO, "any effect on fares" in about a third of the 1,135 markets it identified as at risk of losing a competitor "would be dampened by the presence of a low-cost airline."
But after Smisek told senators that "low-cost carriers are a powerful discipline factor on our ability to raise prices," Bush said LCCs wouldn't mitigate the "anticompetitive effects" of a United-Continental combination. "When LCCs enter markets, with rare exception they are not looking to take on hubs," he said. Providing the example of Southwest Airlines' penchant for flying to uncongested airports, Bush added that low-cost competitors "are looking for easier-out airports. When you have time-sensitive passengers, particularly business passengers, they prefer certain airports to others and in that sense they won't choose the low-cost carrier."
When asked generally if a goal of the merger is to raise fares, Smisek said, "A large portion of the revenue synergies of this transaction is predicated on improving the mix onboard our aircraft--not necessarily the price of any given ticket, but the mix of business travelers. Because of their necessity to travel quickly and at the last minute, they are willing to pay a higher fare."
Added United CEO Glenn Tilton, "This merger is not predicated or calculated on fare increases." Instead, he said the carriers aim to generate "efficiencies" by combining networks and more flexibly using a combined fleet. "I don't think there is any worry that competition will be lessened by the combination of two companies that do not overlap and are committed to using the combined network to increase frequency of service rather than reduce it."
In response, Bush said he takes "with great skepticism the notion that this merger will enhance efficiencies in any way. We have had consolidation of the airline industry for quite some time and we have not seen any change. Instead, we have a cycle of economic violence where we start with a merger which is followed by some sort of economic crisis, followed by bankruptcies, followed by further consolidation and the proclamations that there will be greater efficiencies. Why do we think these efficiencies will somehow pass on to consumers and somehow benefit these markets when there has been no indication that these efficiencies saved the airlines in the past?"
United and Continental face more questioning June 16 when the House Transportation and Infrastructure committee's Aviation subcommittee, is scheduled to hold a hearing. Rep. James Oberstar (D-Minn.), who chairs the committee, has been an outspoken opponent of the proposed merger, which also is being scrutinized by the U.S. Department of Justice.